BMAN23000 Foundations of Finance
Semester 2, 2012-2013
Please Read This Document Carefully
This document describes the coursework component for BMAN23000 which counts for 20% of the final mark for the course. You are required to complete this coursework in groups. You will be randomly allocated to a coursework group of approximately 6 fellow students in the same workshop. Details of coursework groups and companies allocated to each coursework group will be available on Blackboard (in a file called Group and Company Allocation). Details of the assignment are given below. The assignment will be discussed in detail in Workshop 1 in Week 4.
Each coursework group will be allocated two real-life companies that are publicly traded on a U.S. stock market. To find out the names of your group’s two companies, please visit the BMAN23000 Blackboard site: the names of the companies allocated to each coursework group, and the names of the students allocated to each coursework group, are given in the Group and Company Allocation file available from the BMAN23000 Blackboard site. The file indicates which of the two real-life companies you should treat as “Company A” and which as “Company B”. Besides the company names, the Group and Company Allocation file also provides the companies’ identifiers: their PERMNO and GVKEY; these identifiers are used to collect company data from the databases as described below. No further data (besides that in the Group and Company Allocation file) is provided. It is the responsibility of each team (and all team members) to collect all necessary data required to complete the assignment. Suitable databases are available and described below.
To complete this part, you will require data on your two companies’ monthly common-stock returns from January 2002 to December 2011. Required:
a) Suppose you are advising an investor who wants to invest all her wealth in the stock of just one of the two companies allocated to your coursework group (Company A or Company B). i) Provide brief descriptions of Company A and of Company B. ii) Next, compare and contrast the stock return performance of the two companies’ common stocks over the calendar period using monthly return data from Jan 2002 to Dec 2011. Specifically, calculate the mean, variance and standard deviation of the monthly returns of the two stocks separately. iii) Briefly comment on your results and make a stock recommendation. b) Now suppose you are advising an investor who is considering investing all her wealth in a portfolio consisting of the two companies’ common stock held together. i) Calculate the mean, variance and standard deviation of the returns of portfolio comprising the two stocks with equal weights (i.e. 50:50). Next repeat the calculations for alternative portfolio weights, including 20:80, 40:60, 60:40, and 80:20. You may choose to construct additional portfolios (but remember the portfolio weights need to add to 100%). Report your results in a table. Compare and contrast your findings with those of the single-stock portfolios in part (aii). ii) Illustrate your results in part (bi), along with the single-stock results in part (aii), in a graph plotting the trade-off between the mean and standard deviation of the portfolio returns. iii) In the trade-off graph in part (ii), indicate the efficient frontier (assuming the stocks of Company A and B are the only available assets). iv) Finally, identify the minimum variance portfolio in the tradeoff graph. To do so, you can use trial and error, or the method outlined by Copeland, Weston and Shastri (Financial Theory and Corporate Policy, 4th International Edition, pp116-7; a copy of the relevant pages will be on the BMAN23000 Blackboard site). Report the portfolio weights of the minimum-variance portfolio, and the mean, variance and standard deviation of returns of the...